A report in Monday's Wall Street Journal claimed that President George W Bush's administration is "quietly acquiescing" to a dollar drop because it wants a weaker currency to boost foreign sales of US-made goods.

Analysts said that US policymakers are signalling they are happy for the dollar to decline by not aggressively talking up the currency.

A falling dollar would benefit the US economy by making US exports cheaper, and could help reverse the $700bn (£372bn) trade deficit with the rest of the world.

A lack of supply and strong demand has pumped up commodity prices

However, the dollar's fall could also increase the cost of US imports, thus fanning inflation and forcing the Federal Reserve, the US central bank, to continue to increase interest rates.

While that may be good news for the US trade deficit and domestic firms, it is likely to crimp sales growth at large foreign exporters such as electronics firms Sony and Canon, and carmaker Volkswagen.

During Asian trading on Monday, the dollar fell to an eight-month low of 109.66 yen. However, it recovered when European trading started and was recently at 110.35.

The dollar also perked up against the euro and recovered to $1.2787 against the single European currency. It had earlier touched one-year lows.

The greenback also recovered against pound sterling, with one pound worth $1.8845, compared with $1.8895 earlier.

Trade movement

At the same time, China's currency settled below the key 8-yuan level against the dollar for the first time since it was revalued last year.

By setting the yuan's level at 7.9982 versus the US dollar on Monday, China signalled that it was willing to allow its currency to appreciate further against the US dollar, analysts said.

The strength of the dollar against the yuan has been a key issue facing the White House, especially as Chinese exports to the US have surged.

Earlier this month, the US Treasury criticised China for making "too little progress" in reforming its exchange rate, but stopped short of accusing Beijing of manipulating its currency. That would have paved the way for sanctions.